Transcript Slide 1

Economic Institutions of Strategy
Jackson Nickerson
Frahm Family Chair of Organization and Strategy
Agenda
 Describe a new book for young scholars interested
in organization and strategy
 Introduce some current research on Strategic
Problem Formulation
 Have a brief discussion of processes in NIE
 Provide some tips and tricks on how the book and
research might advance your research productivity
Economic Institutions of Strategy
 Volume co-edited with Brian Silverman
 Goals are to:
 Acknowledge the role of transaction cost economics
(TCE) and Oliver Williamson in the field of strategy
 Help junior scholars identify promising research topics
that are feasible empirically
 Suggest that TCE is not just a “background” theory
but remains a growth engine for understanding
organization and strategy
 Publication date: September 2009
 Volume part of Advances in Strategic Management
Table of Contents
 Foreword by Oliver E. Williamson
 Introduction: Jackson Nickerson / Brian Silverman
 Part I: Development of new technology
 1. Transaction Costs in Technology Transfer and
Implications for Strategy,
Ajay Agrawal
 2. Organizational Economics’ Insights from
Acquisitions Research,
Jeffrey J. Reuer
TOC - continued
 Part II: Development of new business
opportunity/business models
 3. Opportunities and New Business Models:
Transaction Cost and Property Rights Perspectives
on Entrepreneurship,
Nils Stieglitz and Nicolai J. Foss
 4. The Problem Solving Perspective: A Strategic
Approach to Understanding Environment and
Organisation,
Michael J. Leiblein and Jeffrey T. Macher
TOC - continued
 Part III: Competitive advantage and performance
 5. The Future of Inter-firm Contract Research:
Opportunities Based on Prior Research & Nontraditional Tools,
Libby Weber, Kyle Mayer, Rui Wu
 6. Alliances and performance
Joanne Oxley
 7. A Strategic Look at the Organizational Form of
Franchising,
Steven Michael and Janet Bercovitz
 8. Internal Organization from a Transaction Cost
Perspective, Nicholas Argyres
TOC - continued
 Part IV: Corporate strategy
 9.Strategic Organization of R&D
Bruno Cassiman and Alfonso Gambardella
 10. Limits to the Scale and Scope of the Firm,
Todd Zenger and Jeffrey Xiaofei Huang
 Part V: Industry analysis
 11.Diversification, Industry Structure, and Firm
Strategy: An Organizational Economics Perspective
Peter G. Klein and Lasse B. Lien
 12. Intellectual Property Regimes and Firm Strategy:
Putting Hall and Ziedonis (2001) in Perspective
Rosemarie ZIEDONIS
TOC - continued
 Part VI: Location, national institutions, and strategy
 13. Value Creation and Appropriation Through
Geographic Strategy: Evidence from Foreign Direct
Investment
Miguel A. Ramos and J. Myles Shaver
 14. Beyond the Economic Institutions of Strategy:
Strategic Responses to Institutional Variation
Witold Jerzy Henisz
 15. Integrated Political Strategy
John M. de Figueiredo
 16. Contracting with Governments
Eric Brousseauand Stéphane Saussier
TOC - continued
 Part VII: Dynamics
 17.New frontiers in Strategic Management of
Organizational Change
Jackson Nickerson and Brian Silverman
A Theory of
Strategic Problem Formulation
Markus Baer
Kurt Dirks
Jackson Nickerson
A Consumer Products Company
 Firm historically performed well with steady but low
to moderate profit growth
 Few new product/service ideas get developed and
make it to market, existing-brand refurbishment
 Workforce tends to be older, conservative,
homogenous in attitude
 Few incentives to reward innovation over long run
 Very lean but productive; few slack resources
 High production capacity utilization
 How can the organization profitably grow faster?
An MBA Curriculum Committee
 Charged with creating curriculum to improve student
analytical and communication skills
 Recruiters, faculty, and dean report multiple
instances where skills are lacking
 Committee comprised of faculty from different
functional areas as well as administrators
 Ex ante, neither dean nor committee members
agree on causes of symptom
 Yet each constituency has preferred solutions
 How can the school develop these skills?
A Health Care Company
 A large number of hospitals
 Mission statement centered on providing a particular
kind of quality care, key point of differentiation
 Within-system hospitals differ on patient satisfaction
metrics
 On average no different from other systems
 No consensus on what “quality” means
 What is quality care and how can it be implemented
to differentiate the organization?
How would you help them?
 Each situation is strategic in that decisions can
impact the organization’s strategy.
 Groups were assigned in each case to solve the
problem.
 Each situation is a complex, ill-structured problem.
 Complexity (Simon 1962)
• Many symptoms
• One symptom does not describe another symptom
• Symptom may interact to produce additional effects
 Ill-structured (Fernandes and Simon 1999)
• No consensus approach for addressing symptoms
Agenda for Problem Formulation
 The strategic problem formulation challenge
 Extant literature on problem formulation
 Definitions
 Formulation objective
 Assumptions
 Impediments
 Design goals
 An illustrative process that satisfies design goals
 Implications and future research
Problem formulation challenge
 Most scholars agree that problem solving requires
 Defining the problem
 Generating alternative solutions
 Choosing alternatives
 Implementing choices
 We find vast amounts of research on latter three.
 Almost universally, the research begins with
assuming an already formulated problem.
 e.g. the behavioral theory of the firm.
 Let’s consider research in strategy and policy
Research on problem formulation
 Problem formulation is rarely researched
 1970s saw several investigations into problem
formulation (also called diagnosis and structuring)
 Mostly descriptive and atheoretical
 Mostly focused on individuals
 Very little empirical research—student experiments
 Much of the research died out in the 1980s
 Leading scholars .. Cowan, Lyles, Mitroff, Nutt,
Volkema, Pounds .. moved on, retired, passed away.
 Little progress was made
 Process approaches and OD research diminished
Importance of problem formulation
 The formulation of a problem is often more essential
than its solution.” Einstein and Infeld (1938, 92).
 Diagnosis ... determines in large part … subsequent
course of action” (Mintzberg et al. 1972, 274).
 Poor formulation can lead to error of the third kind,
solving the wrong problem. (Mitroff et al.)
 Problem formulation has the potential for greatly
affecting problem solving:
 quantity and quality of solutions produced, and
 implementation of solutions chosen.
Our project …
 Acknowledges that heterogeneous teams are the
primary vehicle for solving these problems.
 Theoretically identifies set of core impediments
arising from teams that lead to limited formulations.
 Develops a set of “design goals” that guide the
development of mechanisms.
 And offers a structured process that satisfies these
design goals.
Definitions
 A Symptom is something the indicates a presence of
a disorder or opportunity.
 A Web of Symptoms refers to those symptoms for
which evidence implies correlation among them.
 A Problem is a condition, symptom, or set of
symptoms that need to be dealt with or solved.
 Problem (re)formulation is translation of an initial
condition, symptom, or set of symptoms into a
systematized set of statements that identifies a
particular cause or causes of a symptom or set of
symptoms. Equivalent to a diagnosis.
Definitions (cont’d)
 Structured Process comprises a set of facts,
circumstances, or experiences that are observed
and described or that can be observed and
described and are marked by gradual changes
through a series of states (Nickerson et al. 2007).
Formulation objective
 Problem Formulation Comprehensiveness
 the extent to which alternative and relevant problem
formulations are identified with respect to an initial
symptom or web of symptoms
 comprehensiveness increases as the number of
alternative problem formulations grows
 each alternative must illustrate at least one
mechanism that causes as least one symptom
 With an “optimal” formulation unknown and
unknowable, our objective is to …
…improve the comprehensiveness of a
problem’s formulation.
Assumptions
 Humans are boundedly rational
 Individuals face real physiological limits in acquiring,
accumulating and applying knowledge/information
• cognitive capacity (i.e., attention, memory, time)
• costly to acquire, accumulate, and apply cognitive structures
 Individuals can be self-interest seeking with guile
 Relevant knowledge and information is dispersed
across individuals
 Assembled groups/teams will be heterogeneous in
motivation, cognitive structures, and information
 Problems are complex and ill-structured
Impediments
 Theoretical ideal of heterogeneous groups is that
they lead to more comprehensive formulations
 Recent research indicates heterogeneous groups
perform no better than homogeneous ones
 Groups experience some type of process loss,
heterogeneous groups experience more
 Heterogeneity that promises superior performance
also generates impediments that derive from:
 Information
 Cognitive structures
 Motivation
Heterogeneous information
 (Assume homogeneous motivation to begin with)
 Heterogeneous information sets + bounded rationality
 Information sampling
 Difficult to judge which informational elements are likely to be
relevant to a particular problem context
 Individuals will begin by sending cues about what they believe to
be important
 Group members are likely to recognize cues that they already
posses and understand
 Conversation to transfer and verify information sent and received
 Sharing unique information is far costlier in terms of cues and
communication
 Information sampling narrows formulation comprehensiveness
Heterogeneous cognitive structures
 (Assume homogeneous motivation to begin with)
 Heterogeneous cognitive structures + bounded rationality
 Representational gaps (concepts, language, assumptions)
 Individuals are likely to formulate problems in a way that
capitalizes on the knowledge that they possess
 Differences in knowledge sets likely produce problem
understandings that are, at least partially, incompatible
• Difficult and costly for individuals to share knowledge and recombine
representations to explore additional problem formulations (unless
drinking together in Cargese)
• Can promote misunderstanding, conflict and distrust, which increases
cost of communication
 Representational gaps narrow formulation comprehensiveness
Heterogeneous motivation
 Heterogeneous motivations + bounded rationality
 Political maneuverings to protect and enhance self-interest
 Dominance activities
• High stakes increase effort, low stakes acquiesce
 Propensity to jump to solutions
• Economizes on bounded rationality
• Strategically offered to push desired outcome
 Transfer information and cognitive structures strategically
• Attempts to limit alternatives
• Can increase distrust and conflict
• Amplifies information sampling and cognitive gaps
 Heterogeneous motivation narrows formulation
comprehensiveness
Design goals
 Mechanism(s) must
 Prevent members from jumping to solutions
 Limit domination/equalize participation
 Reduce information exchange and sampling problems
 Motivate individuals to reduce representational gaps
 Limit strategic behavior and trust concerns
 Wow! How can this be done?
How can impediments be overcome?
 Three organizational mechanisms are considered:
 economic incentives
 group selections/matching
 structured processes
 Economic incentives
 Comprehensiveness of formulation is not contractible
ex ante
 Transfer of cognitive structures, which is needed to
recombine knowledge, is not contractible ex ante
 Effort in “thinking” is not contractible ex ante and not
verifiable ex post
Overcoming impediments
 Selection/matching of group members
 Pool of potential group member typically is small
because of the need for firm-specific knowledge.
• A small pool limits the ability to form a group with desirable
correlations of motivation, cognition, and information.
 Measurement difficulties make it costly to verifiably
form a group with a desirable correlation.
• E.g., Ex ante homogeneous goals and objectives with
heterogeneous cognitive structures and information.
 Selection does not mitigate all impediments.
 We focus our efforts on structured processes.
A Structured Process
 Finding
 Framing
 Formulating
 Solving
 Implementing
 We will focus on Framing and Formulating
Finding
 A symptom(s) triggers initiation of a group or preexisting group to take up the problem
 Assume complex, ill-structured problem context
 Other processes might be better suited for those
problem contexts that are not complex and structured
 Group composition is chosen
 Heterogeneous for complex, ill-structured context
 Heterogeneous manifests in motivation, cognitive
schema, and information
 Management/team commits to process*
 Finding is not much informed by our process
Does process satisfy design goals?
PHASE 1: FRAMING
 Facilitator specifies focus
and enforces groundrules
(i.e., focus on symptoms
no discussion of
formulation or solutions)
 Use modified nominal
group technique (mNGT)
to reveal comprehensive
set of symptoms
 Group consensus
decision statement
summarizing symptoms
 Verify validity of set of
symptoms via evaluation
by external stakeholders
DESIGN GOALS
PHASE 2: FORMULATION
Prevent members
from
jumping to solutions
 Facilitator specifies focus
and enforces groundrules
(i.e., focus on
formulation; no
discussion of solutions)
Limit
domination/equalize
participation
Reduce information
exchange and
sampling problems
Motivate individuals
to reduce
representational
gaps
Limit strategic
behavior and trust
concerns
 Use modified nominal
group technique (mNGT)
to identify possible
mechanisms causing
symptoms
 Group consensus
decision statement
summarizing formulation
of problem
 Verify validity of problem
formulations via
evaluation by external
stakeholders
How has the process worked?
 Consumer products company
 MBA curriculum committee
 Health care company
 Preliminary validation?
Implications
 New approach to theorizing about problem
formulation–generate process design goals
 While economic incentives and selection may
positively contribute to problem formulation …
…they appear neither necessary nor sufficient
 Cannot guarantee comprehensiveness, only
improvement in comprehensiveness
 Process may provide implementation benefits
 Process consumes time
 Implications for group formation
 Facilitator is necessary
Directions for future research
 Empirical analysis is needed and students won’t do.
 What are the implications for problem solving?
 What about other types of problems?
 Other factors that may matter on the process
 Credibility of commitment to process
 Time
 Outcome
 Selection of knowledge/team members
Links to other literatures
 Formulation in operations
 Creativity in psychology, especially in groups
 Insight in psychology and marketing
 Fallibility in economics
 Cognitive biases in psychology and operations
 Organizational development
 Education
Existing research
 Heiman and Nickerson
 (2002). “Towards reconciling transaction cost economics and the knowledgebased view of the firm: The context of inter-firm collaborations,” International
Journal of the Economics of Business, 9(1) : 97-116.
 (2004). “How do firms manage knowledge sharing while avoiding knowledge
expropriation in inter-firm collaborations,” Managerial and Decision Economics,
25: 401-420.
 Nickerson and Zenger (2004). “A knowledge-based theory of governance
choice,” Organization Science 15(6): 617-632.
 Macher (2006). “Technological development and the boundaries of the firm:
A knowledge-based examination in semiconductor manufacturing,”
Management Science 52(6): 826-843.
 Hsieh, Nickerson and Zenger (2007). “Problem solving and the
entrepreneurial theory of the firm,”Journal of Management Studies.
 Nickerson, Silverman and Zenger (2007). “The ‘problem’ of creating and
capturing value,” Strategic Organization 5(3): 211-225.
Processes in NIE
 John: Constitutions are processes for making ex
post adaptations
 Scott: Contracts are processes for making ex post
adaptations
 Ken: (But for meta some games) Institutions are
processes for selecting among selecting among a
large number of equilibria.
 Is NIE ultimately about the study of processes and
their ability to shape ex post adaptations?
 Is this what NIE scholars typically claim?
 How can we improve the study of processes?
Formulation and your research
 Assertion: Formulation of problem is central to your
success
 We often get “enamored” and locked into solutions
before insuring a “good” problem formulation
 Practical tips
 Verify and improve your formulation and approach to
solution broadly and quickly
• Write a 4-6 page introduction
• As for next day feedback from colleagues and faculty, those
at your school and those you met
• Refine based on feedback and solicit feedback again until
readers agree that you will create value if you deliver on the
introduction
Thank you for your time today!